Click to read the original text for details Costco's high growth is unlike that of traditional physical retail. In the past fiscal quarter, the global retail industry was clouded with gloom, and amidst a bleak earnings season, Costco, with growth in both revenue and net profit, stood out prominently. In April this year, Amazon released its Q1 2022 earnings, with revenue growing 7% but recording its first loss since 2015, amounting to $3.8 billion. In May, Walmart and Target each released quarterly earnings, with profits down 24.8% and 51.9% year-over-year respectively, and revenue growth slowing to 2.4% and 4.02% respectively. Both stocks saw significant declines after the earnings release, with Walmart experiencing its largest single-day drop since 1987. Just yesterday (June 8), Target again lowered its operating margin guidance for the next quarter, halving it from 5.3% at the time of the earnings release to around 2%. Amid losses and stalled growth among major retail giants, Costco's quarterly earnings appear as a breath of fresh air, seemingly demonstrating the superiority of its membership model to the industry. Turning to the domestic market, retail is also in a more difficult period than ever, with hypermarkets under continuous performance pressure and waves of store closures. It seems every retailer is striving to find a way out. Following the previous wave of attempts and the retreat of new species, since last year, a number of local retailers such as Hema, Yonghui, and Hualian have begun intensively investing in warehouse club stores, and this new track has become turbulent. Is Costco's decades of steady growth attributable to the superiority of its warehouse membership model? Could this model become a remedy for Chinese retail? Industry turmoil, Costco continues to be 'stable' On May 26, Costco released its Q3 FY2022 earnings, bringing long-awaited good news to the U.S. retail market. From this quarter's financial data, Costco's net sales increased 16.3% year-over-year to $51.612 billion; net income was $1.353 billion, up 10.9% from $1.22 billion in the same period last year. Compared to Walmart, the world's largest retail giant, Costco's performance this quarter shows two commendable points: 'stronger profitability' and 'resilience against risks'. Walmart fell into a situation of 'increasing revenue but not profit' in Q1 FY2023, with net sales of $140.3 billion, also showing growth but only 2.3%; net income was $2.05 billion, down 24.8% year-over-year. It can be seen that Costco's overall business scale is only 37% of Walmart's, but its net profit reaches 66% of Walmart's. Behind the high profits is the strong contribution of Costco's membership fee income. Of its $1.353 billion profit, $984 million came from membership fees. During the reporting period, its membership numbers grew 10.4%, and renewal rates hit record highs (92.3% in the U.S. and Canada). With highly loyal members, Costco's profit model is well protected. The 'resilience against risks' comes from the recent retail environment in the U.S. This quarter, several top retailers including Amazon, Walmart, Target, and Costco all mentioned a high-frequency word in their post-earnings conference calls: 'uncertainty.' Currently, the U.S. faces the highest inflation rate since 1982 and historical issues such as supply chain shortages from the COVID-19 pandemic. In the face of risk and uncertainty, the superiority of the membership model is revealed. Specifically, on one hand, the low SKU and large-scale purchasing characteristics of the warehouse membership model give it stronger bargaining power with suppliers, to some extent preventing cost inflation from passing through to the product end too quickly. For Walmart, which operates both 'hypermarkets and Sam's Club,' the cost increases from inflation seem difficult to absorb this quarter. Walmart's CEO mentioned in the conference call that 'due to higher supply chain costs, high inflation, and other reasons, our first-quarter costs were higher than expected, and we expect some of these costs to persist.' He also noted that 'our consumers are paying for inflation.' However, we see that Sam's Club, Walmart's membership warehouse, performed better than Walmart overall this quarter. During the reporting period, Sam's Club sales were $19.6 billion, up 17.5% year-over-year, much higher than Walmart's overall 2.3% growth. Membership income also achieved double-digit growth of 10.5%. In contrast, Costco, which solely adopts the membership model, showed stronger confidence in cost management and price control than the giants. Its vice president emphasized in the conference call that they are doing their best to keep prices low: 'Our primary goal is to mitigate any price increases. Our scale makes us important to suppliers, prompting both sides to seek a balance between passing on costs and adhering to values.' He also mentioned that according to the usual practice of raising membership fees every 5-6 years, Costco's fees should have been due for an increase, 'but given the current macro environment and the burden of historically high inflation on our members and all consumers, we believe now is not the right time to raise prices.' Beyond bargaining power, another aspect helping Costco cope with environmental risks is its excellent supply chain management capability. 'If there is a problem with the supply chain for a specific product, we can replace it with our private label and quickly pivot to other products,' the vice president mentioned in the conference call. In summary, Costco's impressive performance this time is both a victory for the warehouse membership model and a victory for the brand's own core competitiveness. The underlying logic of 'gaining member loyalty through extreme cost-effectiveness' helps it better grasp the essence of retail's 'buying and selling.' Two signals of 'membership' in China As two representative international predecessors of Chinese membership supermarkets, Costco did not disclose its operating data for the Chinese market in this quarter's earnings, nor did Walmart separately disclose Sam's Club's data in China. However, by digging into the earnings information, we can basically make two judgments. The positive one is that the paid membership model is gradually being accepted by Chinese consumers, but the other is that this model has still not opened up a big picture. The positive side is reflected in Walmart's earnings data. Walmart's net sales in China grew 7.2% this quarter, but both gross margin and operating expense ratio declined. In the earnings report, Walmart attributed the decline in gross margin to slowing sales growth and the increased share of Sam's Club, which has lower margins; the decline in operating expense ratio was solely attributed to the higher penetration of Sam's Club (which has lower operating costs). It can be seen that for Walmart, compared to its traditional hypermarkets, Sam's Club's audience in the Chinese market is significantly broadening, which has led Walmart to recently adjust its strategy to expand Sam's Club as an important strategy in China. On the other side, Costco has not stopped expanding in China. In this quarter's earnings conference call, its vice president mentioned that four stores are currently under construction in China and will open within the next two years. Judging from the recent reopening of Shanghai, consumer enthusiasm for the two membership supermarkets remains very high. It is understood that on June 1, the day Shanghai fully reopened, the queue at Sam's Club in Qingpu District stretched for a kilometer. To control traffic, the store required entry with a paid reservation code. Costco's scene was equally hot, with netizens joking, 'On reopening day, half went to work, half went to Costco.' The reason why the paid membership model is still difficult to open up in China is, on one hand, the overall number of Costco and Sam's stores in China is still low, and on the other hand, there are still bottlenecks in member retention. In Costco's conference call, when an analyst asked, 'Costco's membership growth in China has been so fast in the past, has the company retained these customers over the years?' Costco's vice president mentioned that the membership renewal rate in the Chinese market is lower than in other global markets. He attributed this partly to the high membership base and partly to the fact that the number of stores in China is still too small to meet consumers' convenience needs. Therefore, with the opening of new stores in Shanghai, the situation may improve. But whether the real situation will be as he expects still needs market verification. Overall, after entering China, the warehouse membership supermarkets that perform well in the U.S. are gradually moving from 'small-scale attempts' to 'normalized expansion,' but whether they can capture a broader market remains unknown. Followers' 'verification' and 'falsification' There are predecessors and successors; Costco has never lacked followers in China. In the past two years, Metro has revived its membership model, and local newcomers such as Hema, Yonghui, fudi, Hualian, and Renrenle have joined, benchmarking against Costco and learning from Costco, making 'membership stores' a new wave of hotspots in retail. To better adapt to domestic consumption habits, local retailers have made their own modifications to the warehouse membership store models of Costco and Sam's. Hema founder Hou Yi said in an interview with 36Kr- Future Consumption last year, 'We learn from Costco's strengths, not to be exactly like Costco.' Therefore, unlike Costco's focus on Western cold dishes, Hema focuses on Chinese food and adds service staff in front of shelves, making it more aligned with Chinese habits in terms of product range and consumption experience. Yonghui's warehouse stores directly abandoned the paid membership model, and the products did not fundamentally differentiate from hypermarkets. Even the large packaging format was modified to allow purchase after being split into individual small packages. An industry insider said, 'Apart from the 'warehouse feel' in product display, the internal logic has not changed.' In the end, compared to the regular stockpiling consumption habits brought by large American families and spaces, the 'big melee' of local retailers is behind strong Chinese characteristics. Whether it is the birth logic of warehouse membership stores or the overall retail environment and consumption habits, they are vastly different from the U.S. When hypermarkets first rose in China, their full-category, high-SKU product range brought a fresh feeling to consumers, fully solving everyone's one-stop shopping needs. This platform business model of 'earning product price differences' was done vividly. But with the impact of e-commerce and the era of material abundance, both supply and demand have more choices. The high entry fees of hypermarkets discouraged merchants, and highly homogeneous products discouraged consumers. The advantage of 'richness' gradually became a thing of the past. Subsequently, the introduction of the new retail concept and the rise of new species also faded from the retail stage within a few years, ending in 'huge losses.' Now, warehouse membership stores have become the new 'life-saving straw.' However, the concept of 'paying for the right to enter and consume' is difficult to gain universal acceptance among Chinese consumers. Facing a dazzling array of shopping channels such as Taobao, JD.com, Pinduoduo, fresh food e-commerce, and convenience stores, with delivery experiences as fast as half an hour, how many people are willing to pay for a supermarket's products or buy a ticket to enter? Sam's Club took twenty years to answer this question and only slightly received some market response. Another more core issue is whether the products in the store are convincing enough for consumers. Sam's Club CMO Zhang Qing said in a previous interview, 'Members pay to enter, so your products must be excellent and strong. This requires not only professional buyers but also price advantages supported by scale.' Therefore, whether for Sam's and Costco or for many local players, when user mindset and Chinese family structure issues are not well suited to warehouse membership stores, products must be clearly differentiated from other channels. Otherwise, why would consumers buy a ticket to enter? As Zhu Xiaojing, President of Walmart China, said in an interview with Future Consumption last year, 'If you only learn the shell of the membership system without real efficiency, it is meaningless. A qualified retailer needs to think clearly about who they serve, what needs they meet, and in what way they are more qualified than others to meet those needs.' For the warehouse membership store model, entrants must answer the consumer's question: 'Give me a reason to pick you.' Source: Future Consumption APP (ID: lslb168) Good article! Must like, share, and forward.